Intermarket Arbitrage (stocks)

Discussion in 'Trading' started by closdubois, Feb 9, 2007.

  1. Let's say a company is cross-listed on two exchanges and there's a spread (after currency conversion) between the prices. How does someone profit from this? Is it possible to buy on one exchange and sell on the other? Or does he have to buy the 'cheaper' one and hope the prices converge?
  2. dont


    Yes its possible

    But you need to take brokerage into account. Dividend payments. You have to buy the cheap and sell the expensive. You can't just buy the cheap, because the expensive share could come down and the cheap stay where its is.

    In addition to buying the cheap share in one currency and selling the other in another currency, you need to do a spot currency trade in the opposite direction.

    The best way to unwind is to instruct your broker to deliver the shares you are long to the exchange you are short, any currency movement is offset by your spot currency hedge.

    If you unwind both legs you pay brokerage all over again.

    By the way sitting on the bid/offer on one share and then trying to trade the other at the offer/bid is not arbitrage.

    Normally these situations are watched by the big brokers and banks and are traded electronically. And then settled as I described above.

    For this reason the spreads are small and you need massive positions to make a decent coin at the end of the day.

    Also be careful of stocks listed on two exchanges in different time zones.
  3. What about doing this with stock index futures?
  4. The IB TWS doesn't let me trade across exchanges. Does that mean I have to call in every time to make a trade? They seem to be the only one that offers foreign markets...
  5. You have to open two seperate trading accounts from two totally different brokers. Then arbitrage trade your two seperate accounts against each other. Many traders have multiple brokerage accounts.
  6. dont


    Assuming the Indexes are the same it should work fine but remember you have an open currency position. I can't see if you have a universal account with IB why you can't do it?
  7. He didn't say he was trading currencies.
  8. dont


    If he sells an Index in one currency and buys it in another currency he has a currency exposure!

    Unless he is talking about trading an Index on two exchanges in one country and if thats the USA then what does he think smart routing is for.
  9. Can you illustrate that with an example?
  10. Don't know how. I just heard they do it. I never did it myself. The way somebody explained it to me was like this: The mini S&P trades at .25 increments and the big S&P trades at .20 cent increments. So they can buy and sell each other all day long and make money. That's all I know. Maybe somebody can recommend a book, DVD or a mentor that teaches this sort of arbitrage. I think it's called index arbitrage. I never tried it myself. Maybe somebody else knows better.
    #10     Feb 9, 2007